The Lowdown on Loans

The Lowdown on Loans – What Determines Your Mortgage Rate?

Understanding mortgage loans and interest rates can be confusing and frustrating for many homebuyers. It doesn’t help that most advertised rates are just a marketing ploy to lure you in!

In fact, a loan officer, like me, looks at several factors to determine an interest rate based on YOUR specific financial situation, including your credit score, your down-payment amount, your loan amount, and even the type of home you purchase.

The bottom line is — Every loan scenario is unique, which means you might get a different interest rate than the person next to you (and the one you saw advertised).

No One-Size-Fits-All Interest Rate

Here are 4 important points to be aware of before you go shopping for a loan:

• Rates vary depending on the market and several borrower-specific factors. That’s what makes it complicated.
• There are tons of different banks, credit unions and lenders that offer entirely different type of loans and corresponding interest rates.
• The rates you see advertised are usually meant for someone with excellent credit, applying for an owner-occupied single-family home loan, with a big down-payment.
• Your scenario is unique, so it’s good to know about all the factors loan officers are interested in when you apply for a loan.

Loan Purpose

The two purposes for a mortgage loan:

• A purchase money mortgage applies to the purchase of a principal residence, second home or investment property.
• A refinance loan is when you want to obtain new financing for an existing loan. Many people do this to get a lower rate for your original purchase money mortgage.

Loan Amount

Your rate will be different depending on the size of your mortgage. Your rate will likely be lowest when your loan amount is within the current conforming loan limits $647,200.

When you hear things like “jumbo loans” and “conforming loan limits”, these are the loan amounts above $647,200 which can affect your interest rate.

Credit Score

This one is pretty simple: the higher your credit score, the lower your rate for the program you’re in.

This is an important factor to determining your mortgage rate. But, your score isn’t the only thing that matters; what it says on your credit report matters too!

Loan-to-Value Ratio

The loan-to-value ratio is the loan amount as a percentage of the total appraised value of the property. The higher the loan-to-value percentage, typically the higher your costs may be.

Property Type

If you’re purchasing a single-family residence, the mortgage fees will be slightly lower than if you were to purchase a condo. This is because a condo is part of a larger complex, so if other owners in the complex miss a payment or there are vacant condos, your condo will lose value. Similar interest rates are given for co-ops.

Occupancy Type

There are three types of occupancy: owner-occupied, second home or investment property.

A second home will have slightly higher mortgage rates and an investment property may be even higher. This is simply because there’s less of a chance that a homeowner will walk away and miss payments on their own residence.

Debt-to-Income Ratio

This is how a loan officer determines how much home you can afford in a monthly payment.

It is your monthly liabilities divided by your monthly income. This gives us a percentage; and the lower the percentage, the less likely you are to not make your mortgage payment.

First Steps to Take

This is all about risk. Loan officers, like us, base the interest rate they quote you on how much risk they see in loaning money to you. They use the factors listed above. That’s why I will always give you as much information as possible about the process and how to prepare your finances so you can get the best loan option for your situation.

All of this can feel overwhelming and complicated, but don’t worry – you’re not alone!

No matter what your scenario is, we are here to walk you through the loan process. I’m here to answer all your questions and lead you step-by-step to your best deal. Email us at kurrleteam@firsthome.com to get started!